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IROQ > SEC Filings for IROQ > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for IF BANCORP, INC.

Form 10-Q for IF BANCORP, INC.


13-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts, but rather are statements based on management's current expectations regarding its business strategies and their intended results and IF Bancorp, Inc.'s ("the Company") future performance. Forward-looking statements are preceded by terms such as "expects," "believes," "anticipates," "intends" and similar expressions.

Management's ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on our actual results include, but are not limited to, general economic conditions, changes in the interest rate environment, legislative or regulatory changes that may adversely affect our business, changes in accounting policies and practices, changes in competition and demand for financial services, adverse changes in the securities markets and changes in the quality or composition of the Association's loan or investment portfolios. Additional factors that may affect our results are discussed under "Item 1A. - Risk Factors", in the Company's Annual Report on Form 10-K for the year ended June 30, 2012, and the Company's other filings with the SEC. These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. IF Bancorp, Inc. assumes no obligation to update any forward-looking statement, except as may be required by law.

Overview

On July 7, 2011 we completed our initial public offering of common stock in connection with Iroquois Federal Savings and Loan Association's (the "Association") mutual-to-stock conversion, selling 4,496,500 shares of common stock at $10.00 per share, including 384,900 shares sold to Iroquois Federal's employee stock ownership plan, and raising approximately $45.0 million of gross proceeds. In addition, we issued 314,755 shares of our common stock to the Iroquois Federal Foundation bringing our total shares to 4,811,255. The 314,755 shares donated to the foundation were valued at $3,147,550 ($10.00 per share) at the time of the conversion. This $3,147,550 and a $450,000 cash donation to the foundation were both expensed during the quarter ended September 30, 2011.

The Company is a savings and loan holding company and is subject to regulation by the Board of Governors of the Federal Reserve System. The Company's business activities are limited to oversight of its investment in the Association.

The Association is primarily engaged in providing a full range of banking and mortgage services to individual and corporate customers within a 100-mile radius of its locations in Watseka, Danville, Clifton and Hoopeston, Illinois and Osage Beach, Missouri. The principal activity of the Association's wholly-owned subsidiary, L.C.I. Service Corporation ("L.C.I."), is the sale of property and casualty insurance. The Association is subject to regulation by the Office of the Controller of the Currency and the Federal Deposit Insurance Corporation.

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, investment securities and other interest-earning assets, and the interest paid on our interest-bearing liabilities, consisting primarily of savings and transaction accounts, certificates of deposit, and Federal Home Loan Bank of Chicago advances. Our results of operations also are affected by our provision for loan losses, noninterest income and noninterest expense. Noninterest income consists primarily of customer service fees, brokerage commission income, insurance commission income, net realized gains on loan sales, mortgage banking income, and income on bank-owned life insurance. Noninterest expense consists primarily of compensation and benefits, occupancy and equipment, data processing, professional fees, marketing, office supplies, federal deposit insurance premiums, and foreclosed assets. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.


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Our net interest rate spread (the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities) decreased to 2.82% for the three months ended September 30, 2012 from 2.89% for the three months ended September 30, 2011. An increase in interest-earning assets contributed to an increase in net interest income to $3.6 million, or $14.4 million on an annualized basis for the three months ended September 30, 2012 from $3.4 million, or $13.8 million on an annualized basis, for the three months ended September 30, 2011.

Our emphasis on conservative loan underwriting has resulted in relatively low levels of non-performing assets at a time when many financial institutions are experiencing significant asset quality issues. Our non-performing assets totaled $7.0 million or 1.4% of total assets at September 30, 2012, and $6.6 million, or 1.3% of total assets at June 30, 2012.

At September 30, 2012, the Association was categorized as "well capitalized" under regulatory capital requirements.

Our net income for the three months ended September 30, 2012 was $1.1 million, compared to a net loss of $1.4 million for the three months ended September 30, 2011. The increase in net income was due to a decrease in noninterest expense, which occurred because the three months ended September 30, 2011 included a $3.6 million contribution to our newly established charitable foundation, an increase in noninterest income and decreases in interest expense and the provision for loan losses, partially offset by a decrease in interest income.

Management's discussion and analysis of the financial condition and results of operations at and for three months ended September 30, 2012 and 2011 is intended to assist in understanding the financial condition and results of operations of the Association. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing in Part I, Item 1 of this quarterly report on Form 10-Q.

Critical Accounting Policies

We define critical accounting policies as those policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income. We consider the following to be our critical accounting policies.

Allowance for Loan Losses. We believe that the allowance for loan losses and related provision for loan losses are particularly susceptible to change in the near term, due to changes in credit quality which are evidenced by trends in charge-offs and in the volume and severity of past due loans. In addition, our portfolio is comprised of a substantial amount of commercial real estate loans which generally have greater credit risk than one-to-four family residential mortgage and consumer loans because these loans generally have larger principal balances and are non-homogenous.

The allowance for loan losses is maintained at a level to provide for probable credit losses inherent in the loan portfolio at the balance sheet date. Based on our estimate of the level of allowance for loan losses required, we record a provision for loan losses as a charge to earnings to maintain the allowance for loan losses at an appropriate level. The estimate of our credit losses is applied to two general categories of loans:

loans that we evaluate individually for impairment under ASC 310-10, "Receivables;" and

groups of loans with similar risk characteristics that we evaluate collectively for impairment under ASC 450-20, "Loss Contingencies."

The allowance for loan losses is evaluated on a regular basis by management and reflects consideration of all significant factors that affect the collectability of the loan portfolio. The factors used to evaluate the collectability of the loan portfolio include, but are not limited to, current economic conditions, our historical loss experience, the nature and volume of the loan portfolio, the financial strength of the borrower, and the estimated value of any underlying collateral. This evaluation is inherently subjective as it requires estimates that are subject to significant revision as more information becomes available. Actual loan losses may be significantly more than the allowance for loan losses we have established which could have a material negative effect on our financial results.


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Income Tax Accounting. The provision for income taxes is based upon income in our consolidated financial statements, rather than amounts reported on our income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on our deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date. Under U.S. GAAP, a valuation allowance is required to be recognized if it is more likely than not that a deferred tax asset will not be realized. The determination as to whether we will be able to realize the deferred tax assets is highly subjective and dependent upon judgment concerning our evaluation of both positive and negative evidence, our forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. Positive evidence includes the existence of taxes paid in available carryback years as well as the probability that taxable income will be generated in future periods, while negative evidence includes any cumulative losses in the current year and prior two years and general business and economic trends. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. Any required valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings. Positions taken in our tax returns may be subject to challenge by the taxing authorities upon examination. The benefit of an uncertain tax position is initially recognized in the financial statements only when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. Differences between our position and the position of tax authorities could result in a reduction of a tax benefit or an increase to a tax liability, which could adversely affect our future income tax expense.

There are no material changes to the critical accounting policies disclosed in IF Bancorp, Inc.'s Form 10-K for fiscal year ended June 30, 2012, as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on September 18, 2012.

Comparison of Financial Condition at September 30 and June 30, 2012

Total assets increased $2.7 million, or 0.5%, to $514.1 million at September 30, 2012 from $511.3 million at June 30, 2012. The increase was primarily due to a $4.3 million increase in cash and cash equivalents and a $1.5 million increase in net loans, partially offset by a decrease of $3.8 million in investment securities.

Net loans receivable, including loans held for sale, increased by $1.5 million, or 0.6%, to $260.4 million at September 30, 2012 from $258.9 million at June 30, 2012. The increase in net loans receivable during this period was due primarily to a $12.9 million, or 39.2%, increase in commercial real estate loans and a $675,000 or 0.5% increase in one-to four family loans. These increases were partially offset by a decrease of $5.3 million, or 13.7% in multi-family loans, a decrease of $5.0 million, or 59.8% in construction loans, a decrease of $2.0 million, or 15.0% in consumer loans, a decrease of $36,000, or 0.3% in commercial business loans, and a decrease of $28,000, or 0.3% in home equity lines of credit.

Investment securities, consisting entirely of securities available for sale, decreased $3.8 million, or 1.7%, to $219.5 million at September 30, 2012 from $223.3 million at June 30, 2012. Purchased investment securities, consisted primarily of agency debt obligations with terms of four to seven years and fixed-rate mortgage backed securities with terms of 15 years, all of which are held as available for sale. We had no securities held to maturity at September 30, 2012 or June 30, 2012.

As of September 30, 2012, Federal Home Loan Bank stock increased $800,000 to $5.0 million, interest receivable increased $233,000 to $2.1 million, and other assets decreased $196,000 to $991,000 from the respective balances as of June 30, 2012. Federal Home Loan Bank stock increased due to stock purchases to support fluctuations in Federal Home Loan Bank advances as we repositioned our investment portfolio. The increase in interest receivable is primarily due to an increase in interest receivable on investments and the decrease in other assets resulted from a decrease in prepaid insurance due to the timing of multi-year premiums and also from a decrease in accounts receivable general due to the receipt of a receivable that was outstanding as of June 30, 2012.


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At September 30, 2012, our investment in bank-owned life insurance was $7.6 million, an increase of $66,000 from $7.5 million at June 30, 2012. We invest in bank-owned life insurance to provide us with a funding source for our benefit plan obligations. Bank-owned life insurance also generally provides us noninterest income that is non-taxable. Federal regulations generally limit our investment in bank-owned life insurance to 25% of our Tier 1 capital plus our allowance for loan losses, which totaled $15.9 million at September 30, 2012.

Deposits increased $502,000, or 0.1%, to $345.0 million at September 30, 2012 from $344.5 million at June 30, 2012. Certificates of deposit, excluding brokered certificates of deposit, decreased $1.3 million, or 0.7%, to $187.4 million, savings, NOW, and money market accounts decreased $7.3 million, or 5.5%, to $126.4 million, brokered certificates of deposit increased $10.1 million, or 88.2%, to $21.6 million, and noninterest bearing demand accounts decreased $1.0 million, or 9.5%, to $9.6 million. Borrowings, which consisted solely of advances from the Federal Home Loan Bank of Chicago, increased $500,000, or 0.7%, to $75.5 million at September 30, 2012 from $75.0 million at June 30, 2012. We increased our borrowings slightly to fund loans, replace deposit outflow, and purchase investment securities as we reposition our portfolio in anticipation of securities being called over the next several months. Current interest rates on borrowings are more favorable than rates paid on deposits.

Other liabilities increased $133,000, or 7.0%, to $2.0 million at September 30, 2012 from $1.9 million on June 30, 2012. The increase was attributable to a general increase in accounts payable and accrued expenses payable due to timing of payments.

Total equity increased $1.6 million, or 1.9%, to $88.3 million at September 30, 2012 from $86.6 million at June 30, 2012. Equity increased due to an increase in unrealized gains on securities available for sale of $538,000 and a net income of $1.1 million. The increase in unrealized gains on securities available-for-sale was due to higher market values of available-for-sale securities. A stock repurchase program was adopted during the quarter ended September 30, 2012, which authorized the company to repurchase up to 240,563 shares of its common stock, or approximately 5% of the current outstanding shares. As of September 30, 2012, 8,004 shares were repurchased, leaving the maximum number of shares that may yet be purchased under the plan at 232,559.

Comparison of Operating Results for the Three Months Ended September 30, 2012 and 2011

General. Net income increased $2.5 million, to $1.1 million net income for the three months ended September 30, 2012 from a $1.4 million net loss for the three months ended September 30, 2011. The increase was primarily due to a decrease in noninterest expense, which occurred because the three months ended September 30, 2011 included a $3.6 million contribution to our newly established charitable foundation, an increase in noninterest income and decreases in interest expense and the provision for loan losses, partially offset by a decrease in interest income.

Net Interest Income. Net interest income increased by $158,000, or 4.6%, to $3.6 million for the three months ended September 30, 2012 from $3.4 million for the three months ended September 30, 2011. The increase was due to a decrease of $236,000 in interest expense, partially offset by a decrease of $78,000 in interest income. The increase in net interest income was primarily the result of lower rates paid on certificates of deposit. We had a $40.1 million, or 8.9% increase in the average balance of interest earning assets, partially offset by a $35.8 million, or 9.5% increase in average balance of interest bearing liabilities. We also had a decrease in our interest rate spread by 7 basis points to 2.82% for the three months ended September 30, 2012 compared to 2.89% for the three months ended September 30, 2011, and a decrease in our net interest margin by 12 basis points to 2.94% for the three months ended September 30, 2012 compared to 3.06% for the three months ended September 30, 2011.

Interest Income. Interest income decreased $78,000, or 1.7%, to $4.4 million for the three months ended September 30, 2012 from $4.5 million for the three months ended September 30, 2011. The decrease in interest income was primarily due to a $41,000 decrease in interest income on loans, which resulted from a 43 basis point, or 8.5% decrease in the average yield on loans from 5.05% to 4.62%, partially offset by a $19.1 million, or 7.9% increase in the average balance of loans to $262.2 million for the three months ended September 30, 2012, from $243.1 million for the three months ended September 30, 2011. Interest on securities decreased $30,000, or 2.4%, as a $15.3 million increase in the average


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balance of securities to $214.0 at September 30, 2012 was more than offset by a 26 basis point decrease in the average yield on securities from 2.82% to 2.56%. The decrease in the average yield on loans and securities reflected a reduction in the current interest rates charged on loans originated and on securities purchased during the period versus the average rates on existing loans and securities in the portfolio.

Interest Expense. Interest expense decreased $236,000, or 22.8%, to $799,000 for the three months ended September 30, 2012 from $1.0 million for the three months ended September 30, 2011. The decrease was primarily due to lower market interest rates during the period.

Interest expense on interest-bearing deposits decreased by $238,000, or 29.4%, to $571,000 for the three months ended September 30, 2012 from $809,000 for the three months ended September 30, 2011. This decrease was primarily due to a decrease of 30 basis points in the average cost of interest-bearing deposits to 0.70% for the three months ended September 30, 2012 from 1.00% for the three months ended September 30, 2011. We experienced decreases in the average cost across all categories of interest-bearing deposits for the three months ended September 30, 2012, reflecting lower market interest rates as compared to the prior period. The decrease was partially offset by a $4.3 million, or 1.3%, increase in the average balance of interest-bearing deposits to $328.4 million for the three months ended September 30, 2012 from $324.0 million for the three months ended September 30, 2011.

Interest expense on borrowings increased $2,000, or 0.9%, to $228,000 for the three months ended September 30, 2012 from $226,000 for the three months ended September 30, 2011. This increase was due to an increase in the average balance of borrowings to $86.7 million for the three months ended September 30, 2012 from $55.2 million for the three months ended September 30, 2011. This was largely offset by a 59 basis point decrease in the average cost of such borrowings to 1.05% for the three months ended September 30, 2012 from 1.64% for the three months ended September 30, 2011.

Provision for Loan Losses. We establish provisions for loan losses, which are charged to operations in order to maintain the allowance for loan losses at a level we consider necessary to absorb probable credit losses inherent in our loan portfolio. We recorded a provision for loan losses of $102,000 for the three months ended September 30, 2012, compared to a provision for loan losses of $139,000 for the three months ended September 30, 2011. The allowance for loan losses was $3.7 million, or 1.39% of total loans, at September 30, 2012, compared to $3.0 million, or 1.24% of total loans, at September 30, 2011 and $3.5 million, or 1.34% of total loans, at June 30, 2012. Non-performing loans increased during the three month period ended September 30, 2012 mainly due to the addition of two relationships: one in the amount of $400,000 which has expressed financial difficulty but all loans are current; and, one $308,000 home loan entering the foreclosure process. Although the loans were substantially collateralized, the first relationship accounted for an addition to the reserves of $68,000 while the second relationship did not require additional reserves. During the three months ended September 30, 2012, a net recovery of $39,000 was recorded while during the three months ended September 30, 2011, a net charge-off of $267,000 was recorded.

The following table sets forth information regarding the allowance for loan losses and nonperforming assets at the dates indicated:

                                                    Three Months
                                                        Ended
                                                    September 30,               Year Ended
                                                        2012                   June 30, 2012

Allowance to non-performing loans                            62.75 %                    65.95 %
Allowance to total loans outstanding at the
end of the period                                             1.39 %                     1.34 %
Net charge-offs (recoveries) to average
total loans outstanding during the period,
annualized                                                    (.02 %)                     .30 %
Total non-performing loans to total loans                     2.22 %                     2.03 %
Total non-performing assets to total assets                   1.36 %                     1.30 %

As shown in the preceding table, our allowance to non-performing loans ratio decreased to 62.75% at September 30, 2012 from 65.95% at June 30, 2012. This decrease in our allowance to non-performing loans was mostly due to a $498,000 increase in non-performing loans. While non-performing loans increased, the increases were in categories of well secured loans. The Company has determined that the allowance remains adequate.


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Noninterest Income. Noninterest income increased $641,000, or 87.8%, to $1.4 million for the three months ended September 30, 2012 compared to $730,000 for the three months ended September 30, 2011. The increase was primarily due to increases in net realized gains on the sale of securities available-for-sale, mortgage banking income, other service charges and fees, and insurance commissions, partially offset by a decrease in customer service fees. For the three months ended September 30, 2012, net realized gains on the sale of securities available for sale increased from $50,000 to $473,000, mortgage banking income (loss) increased from ($28,000) to $114,000, other service charges and fees increased from $43,000 to $72,000, and insurance commissions increased from $183,000 to $203,000 while customer service fees decreased $156,000 to $139,000. The increase in net realized gains on the sale of available-for-sale securities was due to the rate environment in the three months ended September 30, 2012, that allowed for profits to be gained when repositioning the investment portfolio that were not available in the three months ended September 30, 2011. The increase in mortgage banking income was primarily due to an increase in mortgage servicing rights as a result of a higher balance of loans sold at September 30, 2012 compared to September 30, 2011. The increase in other service charges and fees was due to an increase in the number of loan fees, while the increase in insurance commissions was a result of increased premiums on property and casualty insurance. The decrease in customer service fees reflects fewer service fees and charges collected on deposit accounts.

Noninterest Expense. Noninterest expense decreased $3.3 million, or 51.3%, to $3.1 million for the three months ended September 30, 2012 from $6.4 million for the three months ended September 30, 2011. The largest components of this decrease were charitable contributions, which decreased $3.6 million, or 99.9%, and supervisory examinations, which decreased $30,000, or 46.2%. The decrease in charitable contributions was a result of a donation of $3.6 million in stock and cash to fund our charitable foundation in the three months ended September 30, 2011. The decrease in supervisory examinations resulted from the transition from the Office of Thrift Supervision payment schedule to the Office of the Comptroller of the Currency payment schedule for the three months ended September 30, 2011. These decreases were partially offset by increases in compensation and benefits of $121,000, equipment expense of $47,000, and professional services of $31,000. Increased staffing, normal salary increases and increases in payroll taxes primarily accounted for the increase in compensation and benefits expense. Increases in equipment expense were due to routine technology upgrades and expenses incurred to move our information technology department to a more secure and efficient location, and increases in professional services were a result of increased costs associated with operating as a public company.

Income Tax Expense (Benefit). We recorded a provision for income tax of $647,000 for the three months ended September 30, 2012, compared to a benefit for income tax of ($935,000) for the three months ended September 30, 2011, reflecting effective tax rates of 36.3% and (40.5%), respectively. The increased tax rate for the three months ended September 30, 2012, was a result of a lower taxable income in the three months ended September 30, 2011, due to a contribution of $3.6 million to establish our charitable foundation, Iroquois Federal Foundation, Inc.

Asset Quality

At September 30, 2012, our non-accrual loans totaled $5.9 million, including $3.8 million in one-to-four family loans, $1.7 million in multi-family loans, . . .

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